Direct Tax and Indirect Tax: Which Impacts You More?
Taxation in India is not just a legal obligation- it forms the crux of building a progressive nation. Our tax deductions finance the construction of highways, hospitals, schools, various development schemes, and rural and digital infrastructure. It empowers economic policy by influencing inflation, income distribution, and investment trends. Operating under a dual structure, India’s tax ecosystem is broadly categorised as Direct Tax and Indirect Tax. Both Central and State authorities in India administer these taxes.
How is Your Tax Money Used?
Let’s scroll down to understand types of taxes, differences between them, and how they are shaping Indian economic behavior!
What is Direct Tax?
Direct Taxes are imposed on entities (people or businesses) based on their income or revenue and can’t be transferred to another individual. The Income Tax Act, 1961 operates as a legal framework for these tax regulations which are overseen and managed by the Central Board of Direct taxes (CBDT). It follows the progressive tax principle where individuals or organizations with higher income brackets are taxed at higher rates, which align with the goal of unbiased wealth distribution.
Types of Taxes Under Direct Taxation Laws!
- Income Tax: Applicable to individuals falling under different tax brackets depending on their income or revenue.
- Corporate Tax: Companies established in India or executing their operations here, need to pay taxes to the Indian government on the profits earned from the business. They are applied at consistent rates for all individuals unlike IT which is charged based on income brackets.
- Securities Transaction Tax (STT): STT is imposed on the trade value made by the taxpayers that cater to securities listed on prominent stock exchanges.
- Wealth Tax (Abolished in 2015): Previously it was levied on individuals whose net wealth was more than the declared threshold but, now it is replaced with a supplementary charge applied on taxpayers with high income.
- Estate Duty (Abolished in 1985): It was applied before 1985 to transfer wealth through property deals.
What is Indirect Tax?
Indirect Taxes are charged on the products and services by the Indian government and are ultimately borne by the end consumer. Like: a wholesaler transfers the tax burden to retailer and the retailer passes it on to the consumer. As a result, the strain of paying these duties falls on shoppers. These taxes are managed by the Central Board of Indirect Taxes and Customs (CBIC).
Earlier there were multiple indirect taxes levied in India; which resulted in customers paying more than the original price of the product or service bought.
Types of Taxes Under Indirect Tax laws!
- Goods and Services Tax: It is charged on the supply of goods and services and is regulated by the Indian GST Council.
- Custom Duty: It was levied on goods that were imported to India and exported to other countries.
- Excise Duty: It is currently applicable to non-GST purchase items like alcohol and fuel.
Learn more in our guide: What is Income Tax, and how are Different Types Calculated?
How the Indian Government Earns ₹100
Goods and Service Tax: One Nation, One Tax, One Market!
The commencement of the Goods and Services Tax (GST) in India redefined the entire tax ecosystem and the Indian economy witnessed sustainable growth. Eradicating multiple taxes levied, GST ensures that “One Nation, One Tax, and One Market” doesn’t just remain a dream but becomes a reality!
The single unified tax structure applicable across the country turns India into one integrated economic zone. This simplifies doing business and makes our tax ecosystem neutral for consumers.
Every ₹100 spent on goods or services contributes to ₹1.6 Lakh Crore GST Collection Each Month! (Source- Finshots)
Types of GST!
- Central Goods and Services tax (CGST): The central authority applies these taxes on taxable supplies within the state. The collected amount is mostly used for highways, defence, and national schemes.
- State Goods and Services Tax (SGST): It is charged by the government of respective states on taxable supplies that are carried on within the single state. It is mostly used to construct state infrastructure, schools and hospitals.
- Union Territory Goods and Services Tax (UTGST): It is imposed by the union government on taxable supplies within the same union territory.
- IGST: Integrated GST offers fair distribution between two states for interstate purchases.
Read More: Different Types of GST Returns
Direct Tax and Indirect Tax: What is the Real Difference?
While both serve the same ultimate goal of financing the Indian government, Direct Tax and Indirect Tax differ in a way they affect your wallet. While one is visible and can’t be avoided, the other is silently backed into every transaction you make.
To understand the difference between Direct and Indirect Tax, let’s not just look at who pays it but also emphasise on how it’s paid, when it’s felt, and who ultimately bears the burden.
| Context of Differentiation | Direct Tax | Indirect tax |
|---|---|---|
| Applied On | Income or revenue earned by a taxpayer | Applied on Goods and services purchased |
| Paid By | Paid directly by the individuals or entities | They are paid indirectly by the shoppers who consume the products from the sellers |
| How is it paid? | Entities pay a share of their taxable income directly to the government | These are paid to the government through the intermediary |
| Who Bears the Load? | Taxpayers bear all the burden and can’t shift it to someone else | The burden ultimately gets shifted to the end consumer as sellers collect it from them |
| Visibility | Clearly visible to the taxpayer | Often hidden under the MRP of the product or cost of service |
| Nature of Direct Tax and Indirect Tax | Progressive as higher income slab implies higher tax rates | The system looks unfair or regressive as same tax rates are applied to all individuals without considering the income brackets |
| How does it impact you? | Directly reduces our take-home payment | Affects our purchasing capabilities directly |
| Compliance Requirements | Taxpayers file returns to pay the taxes | Generally, businesses handle the compliance requirements, consumers pay them passively |
| Examples of Direct and Indirect Tax | Income tax that gets deducted from your salary | GST incorporated in your grocery bill or movie ticket |
Direct Tax and Indirect Tax: Which Affects You More?
The impact of Direct Tax and Indirect Tax varies for all individuals, depending on how much you earn and how much you spend.
For high income earners, direct tax hits harder as it is progressive in nature. The more you earn the more tax you need to pay. It either gets deducted from your salary or individuals file returns to pay it, so its impact is clearly visible.
For individuals with average income, each time you stop, shop, eat, and pay bills – the indirect tax silently attacks your wallet. Here’s the twist- indirect taxes are regressive and everyone (billionaire or poor) pay the same taxes every time you consume goods or services. This might not affect people with high income, but the middle class and people with lower income have to suffer.
While direct taxes just affect people with higher income, indirect taxes in the long-run will be more impactful as everyone spends even if they don’t earn.
Let’s Conclude!
It doesn’t matter if you pay taxes at the forefront or silently through your purchase- both Direct Tax and Indirect Tax form the crux of a nation’s economy. They might differ in nature, impact, and application; but serve the common goal of financing India’s infrastructure, defence, and schemes.
The above article takes you through a complete manual on Direct Tax and Indirect Tax, how the government collects tax from you, and how it is spent. It also walks you through the difference between direct and indirect tax and their impact. If you have any query, shoot it below and get it resolved.
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FAQs for Direct Tax and Indirect Tax
1. Advantages and Disadvantages of Indirect Tax?
Advantages:
- It can be easily collected from the end consumer
- The burden of paying taxes can be transferred
Disadvantages:
- The overall cost of goods and services increases
- Tax amount in the bill is often unpredictable as it depends on the purchase made
2. Corporate Tax is direct or indirect tax?
Corporate Tax is a direct tax as it is applied directly on the profits earned by the company.
3. Do direct tax and indirect taxes imply different rates?
Yes, direct tax and indirect tax have different tax rates.
4. Is TDS Direct or Indirect Tax?
Tax deducted at source is a way of collecting indirect tax.
